Friday, October 31. 2008

There is an interesting report out today on the game theory of the music industry (See here on El Reg - though I saw it first on TechDirt). This led me to thinking about how this music game theory may be applied to online video. Consider their economic analysis for music:

Media Pricing Model

What the model shows is that the current situation is non optimal. The distributor, by underpricing the broadband assets, is incurring extra traffic (X axis) without being able to attract the revenue for it that exists in the market (Y axis). While this effect is "interesting" for Audio, it gets into the "Catastrophic" mode for Video, as the bandwidth impact for underpricing video is far, far worse.

Sadly, the game theory the report outlines for the players (aggregators, rights collectors, distributors) is non optimal today, as there is very little chance that they will collaborate to increase the market value - the inclination to defect is more likely. This leads to a broken supply chain with value (and new content creation) leaking away.

Now again, this is "interesting" for music - but as an industry its a fraction of the size of video - so if the same were to occur there it would be....well, you got the picture.

The (half a) trillion dollar question of course is how one can incentivise them to "play nice" together - clearly some form of extracting that revenue and allowing (i) The Distributors invest in capacity and (ii) some revenues to move back into content creation would help. As the authors note:

"Fixing the broken supply chain between content and connectivity provides more reasons to invest... Not only does the market become more buoyant, due to less leakage and more reward, but it also becomes more diverse - as those songwriters, publishers, artists, and record labels currently contemplating leaving the industry choose to stay, whilst more parties - be they rights holders or rights users - outside of the industry they choose to enter."

El Reg notes that there are 4 possible scenarios to fix the market:

The first option, "do nothing", means the negative externalities simply pile up. The second is to step up litigation and prohibition. However,the paper notes, "there is little evidence suggesting the costly process of pushing down on the black market will indeed raise up the demand for the licensed market."

The other two options involve licensing file sharing networks: pulling services like the old Napster or Oink into the legitimate market. There's a flat tax or levy approach to charging for this - sticking (for example) £2 on everybody's monthly broadband bill. However, this may cause more problems than it cures, the authors caution - since nobody has an incentive to invest in creating or promoting new music services.

But there's also a voluntary subscription method of offering these. More work is needed on this too, the authors recommend, such as calculating the effect on today's players such as iTunes and the displacement costs. But the inference we are invited to make is that this is the most attractive of the four, provided the incentives can be lined up.

Techdirt has a point I think when they note that a bit more thinking may be needed, as the authors:

....don't seem to take into account the idea that (a) there are other players in the market that should be considered in the ecosystem and (b) one of the three legs of the stool set forth in the premise (the collections societies) may not be needed. If you take them out of the equation, but plug in other components of the market (say, the musicians themselves) you can quite easily see the model working quite differently than what's described in the report.

Interestingly, I see that today a UK company is offering a deal with as much music as you can eat for £100 per annum. Now if that were to happen for Video, and a proportion of that surplus were returned to the pipe providers and new content creators in both cases, it could have the makings of a market structure.

Disclosure - This is funny - after writing this post I read that one of the report's authors is Telebusillis / STL Partners' Keith McMahon, who I'm working with on the Future of Online Video Distribution (I'll be presenting some of the findings as part of the Telco 2.0 Initiative next week next week) - I didn't know he was doing the music report - and he doesn't know I've written this - yet

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